Credit Markets Eye Fed Decision With $25 Billion of Sales on Tap

(Bloomberg) -- Investors will be anxiously awaiting the Federal Reserve interest rate decision next week.

Markets have already priced in a 50-basis-point hike on Wednesday, expecting the Fed will take a quicker approach in order to squash stubborn inflation. Accelerating U.S. labor costs and a resilient consumer are effectively giving the central bank the green light to raise interest rates by a half-point next week to tamp down price pressures.

What the Fed does next week will sway markets which are currently pricing in a near-equal chance that Fed policy makers in June will raise their benchmark rate by 75 basis points. The Fed hasn't done a 75-basis-point increase since 1994, toward the end of a path from 3% to 6%.

Kicking Off May

Next week's investment-grade issuance estimates call for about $25 billion, with some desks anticipating $125 billion to $150 billion in the historically busy month. Last May, just over $136 billion was issued compared to estimates projecting $150 billion. April, meanwhile, is set to close with $107.2 billion in sales.

Blue-chip companies sold just $8.6 billion this week, well below consensus estimates calling for as much as $25 billion. This was the second biggest miss this year, data compiled by Bloomberg show, after the week of Jan. 24, when just $2.6 billion of new debt was raised, well short of projections of $15 billion to $20 billion.

Overall market volatility quelled high-grade issuance all week in the primary market with most companies opting to stand down to take another look at a later date. Most if not all the borrowers that elected to remain on the sidelines this week will gauge whether to move forward with debt sales on Monday and Tuesday, dealers said.

Rising inflation, geopolitical risks and market volatility spurred by U.S. monetary tightening have all helped shrink junk bond supply to the lowest in more than a decade, with year-to-date bond sales at just $54 billion, Bloomberg-compiled data show.

U.S. junk-bond yields have risen 265 basis points so far this year as of Thursday, and have increased steadily for four straight months to an almost two-year high of 6.86%. The index is set to close April with the worst losses since March 2020.

Medical device company Bioventus Inc.'s $415 million offering of five-year junk bonds remains on the agenda next week. The note sale, its first ever, was originally expected to price on Thursday. It's the only offering in the junk-bond market as of Friday.

In the U.S. leveraged loan market, primary market sales have been subdued as of late. While there are no bank meetings for new issues on the docket for next week, at least eight offerings in syndication are expected to clear. That includes a $2.5 billion debt sale from eye-care company Bausch + Lomb Corp., which is raising the funds to help fund its spinoff from Bausch Health Cos.

A slowdown in issuance has allowed the market to heal, Chris Bonner, head of leveraged finance capital markets at Goldman Sachs Group Inc, said at Bloomberg‘s online leveraged loan conference on Wednesday. Cash balances have grown and investors will likely be supportive of mega deals to support M&A, including those backing Elon Musk's take-private of Twitter Inc. and the buyout of Citrix Systems Inc.

In distressed watch, Endo International reports quarterly earnings. The company is conducting a strategic review and exploring “a wide array of potential actions as part of our contingency planning” to address thousands of opioid lawsuits, possibly including bankruptcy; opioid state and local settlements could total $1 billion to $2 billion, according to Bloomberg Intelligence.